Circular No. No.402/92/2006-MC (09 of 2011)

Signing of DTAA between India and Ehiopia

What this is

Circular No. No.402/92/2006-MC (09 of 2011) was issued by the Central Board of Direct Taxes on 27 May 2011. Its subject is Signing of DTAA between India and Ehiopia.

This one is about a tax treaty. India’s treaties enter Indian law by notification under section 90; where the instrument below is that notification, its date decides from when the treaty may be applied, and where it is a circular, it is the Board telling its officers how it reads the treaty — which is not the same thing.

What it does

Announces the signing on 25 May 2011 at Addis Ababa of the double taxation avoidance agreement between India and Ethiopia and summarises its terms. Business profits are taxable in the source state where the enterprise has a permanent establishment there, such as a branch or factory, and a construction, assembly or installation project is taxed in the source state if it continues there for more than 183 days. Profits from the operation of ships or aircraft in international traffic are taxable only in the state of residence. Dividends, interest, royalties and fees for technical services are taxable in both states, with the source-state rate capped at 7.5 per cent for dividends and 10 per cent for interest, royalties and fees for technical services. Capital gains from the sale of shares are taxable in the source country. The agreement carries provisions for exchange of information, including banking information, and assistance in the collection of taxes in line with internationally accepted standards, and anti-abuse provisions to keep the benefits with genuine residents of the two states.

Why it was issued

To announce the signing and describe what the agreement provides; the release says it will give tax stability to residents of both countries and stimulate the flow of investment, technology and services.

Who it reaches

Indian enterprises with projects or a presence in Ethiopia
Ethiopian residents receiving dividends, interest, royalties or technical fees from India
Payers withholding on cross-border payments between the two countries
Shipping and airline enterprises operating between the two

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

Signing of DTAA between India and Ehiopia
No.402/92/2006-MC (09 of 2011)
Government of India / Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi dated the 27th May, 2011

PRESS RELEASE

The Government of the Republic of India signed a Double Taxation Avoidance Agreement (DTAA) with the Federal Democratic Republic of Ethiopia for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income on 25th May, 2011 at Addis Ababa. The Agreement was signed by Shri S.M. Krishna, External Affairs Minister on behalf of the Government of India and by Mr. Sufian Ahmed, Minister of Finance and Economic Development on behalf of the Federal Democratic Republic of Ethiopia in the presence of the Prime Minister, Dr. Manmohan Singh and the Ethiopian Prime Minister. Mr. Meles Zenawi.

The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Examples of permanent establishment include a branch, factory, etc. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 183 days.

Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest, royalties and fees for technical services income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest, royalties and fees for technical services. Capital gains from the scale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

The Agreement will provide tax stability to the residents of India and Ethiopia and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Ethiopia.

What to watch

The construction project threshold is 183 days in the source state — a project that runs past it creates a permanent establishment.
The source-state caps of 7.5 per cent and 10 per cent are ceilings under the agreement; the domestic rate applies if it is lower.
Capital gains on shares are taxable in the source country, so this treaty does not shelter share transfers.
This is a press release announcing signature; the agreement takes effect on its own terms, so entry into force must be checked before relying on it for a year.

Where you meet it

When deciding withholding on a payment to an Ethiopian resident, or when a permanent establishment is alleged on an Indian enterprise's project in Ethiopia.

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.